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Are you standing at the threshold of
your retirement or have you already retired and are wondering what your
investment options are? There is good news for those approaching
retirement or already retired. Along with other options including bank
deposits, bonds, mutual funds, stocks and real estate, annuities
present yet another opportunity in the Nigerian financial market.

In 2009, two regulatory bodies, the
National Insurance Commission (NAICOM) and Pension Commission (PENCOM)
jointly issued a document that regulates the conduct of annuity
business in Nigeria in compliance with provisions of the Pensions
Reforms Act 2004. The Act provides that a retiring employee is entitled
to receive retirement benefits through programmed withdrawals, by
purchasing a life annuity, or a combination of the two.

Most of the retirees under the 2004
pension dispensation opted for programmed withdrawals instead of life
annuities. Following the release of the new regulations, some life
insurance companies in Nigeria have responded positively to the call on
them to introduce annuity products to align with the economic realities
that retirees face and thus create a better pension environment for
Nigerian workers. It is expected that more retirees will adopt this
option.

An annuity is an important retirement
planning tool and is simply a contract between you and an insurance
company. In return for a sum of money the insurance company is obliged
to provide you with a steady and stable source of income for life. A
range of annuity products are now offered by life insurance companies
in Nigeria with various features. Choosing the “right” one for you is
dependant on your specific needs, preferences and financial standing.

Immediate or deferred annuities?

An immediate annuity is ideal when you
want the income to start right away whilst with a deferred annuity you
are building up value over a period of time to be converted to income
later on.

With a single life immediate annuity,
you deposit an amount with the insurer, who begins to make regular
payments. You choose a deferred annuity if you want to build your
account value over time and convert it to income in the future.
Deferred annuities can be bought with a lump sum payment or a series of
regular payments that could be monthly, quarterly, biannually or
annually.

In some plans, policyholders can choose
an increasing annuity at five percent per annum guaranteed for ten
years and thereafter for life. In others there is the option to choose
an increasing annuity at ten percent per annum guaranteed for ten years
and thereafter for life. By choosing an increasing annuity one is more
likely to be protected from the effects of inflation.

Income for life

Issues such as increased life
expectancy and anxiety over whether one’s savings may get exhausted
within one’s lifetime, are to a large extent addressed by annuities;
the reliable and steady source of life income offers comfort and a
sense of security almost replacing pensions as a reliable retirement
tool. Even those close to retirement age can still invest in an
immediate annuity and begin receiving income from it almost instantly
which comes with a tax deferral advantage.

Annuities offer some stability

Annuities are a dependable option for
those who seek some protection from the risk associated with the
investment of lump sum benefits and the chance of losing part of their
savings through investment failure that other options tend to suffer.
Assets are managed by professional asset managers who provide you with
variety of asset classes including mutual funds, stocks, money market
instruments, direct real estate and Real Estate Investment Trusts
(REITS), and combinations as appropriate. Naturally the value of your
annuity will vary depending on the performance of the underlying
investments.

Annuities have a place in estate planning

Annuities provide the option of leaving
money for one’s heirs after the death of the investor. A couple can
hold an annuity jointly and so after the death of one partner the other
will continue to receive income from the annuity. This gives investors
comfort in the knowledge that in the event of the death of one partner
the other will continue to be secure. A guaranteed death benefit
ensures the policy beneficiary will receive at least a minimum amount
if the original owner dies within the guaranteed period.

Whilst annuities can be a good
alternative with many advantages, as with all investments, there is a
downside that one should be aware of and which must be carefully
considered.

Annuities can be inflexible

Annuities are sometimes regarded as
inflexible retirement tools when compared to other options such as
bonds. Let’s assume you decide to invest your money in a diversified
portfolio of blue chip, corporate bonds. When you invest in bonds you
receive interest payments periodically, and thereafter, on maturity you
have your money back. There is also the option to sell your bond prior
to maturity. The difference is, that with an annuity, the full value is
surrendered to the insurance company in return for lifetime income; you
don’t necessarily have the right to get your money back. One continues
to have access to your money in a deferred annuity until you convert
your accumulated assets to a revenue stream.

Will the insurer survive?

Your annuity is only as certain as the
strength and solvency of the company you invest with. Insurance
companies are heavily regulated and the annuity business is closely
monitored by National Insurance Commission, and the Pension Commission.
Insurance companies are also rated by professional agencies; this
should also guide in your selection of a strong, reputable institution.
Further, an annuitant is able to change his or her insurer after two
years if they are dissatisfied or concerned in any way.

Be aware of charges

The set-up costs, commissions, and
annual investment management fees associated with annuities can be
confusing, making it difficult to decipher how much you are actually
paying. Ideal for providing stable steady income, they tend to be
limiting when it comes to catering to sudden significant expenses. If
you need the money sooner than expected, you will incur “surrender
charges” which can be steep. All these costs add up and will certainly
eat into any profits the annuity earns.

If all you want is an alternative source of income and are more
inclined towards a conservative, quiet retirement plan, then annuities
might be a good option. Before you enter into any transaction that is
hard to reverse, it is important to go through the fine print as
tiresome as this may seem. You must understand how it works and
consider it alongside other alternatives, so that you can make an
informed decision as to the one that is most appropriate for you. As
always, maintain a diversified portfolio and don’t put all your eggs in
one basket.</

Some bank officials
have expressed reservations about the new banking model recently
introduced by the Central Bank, which is to be operational from
October. They are of the opinion that the problems of the industry runs
deeper than mere change of business model.

A source at First
Bank Nigeria, who pleaded anonymity because he was not authorised to
speak on the issue, said the industry is still getting a hang on the
issues raised. According to him, some banks may begin serial meetings
as the week begins. “An exposure draft had been circulated by the CBN
earlier, so the provisions are not new,” he said.

In the new
circular, the Central Bank stated that commercial banks would have to
discontinue activities not related to core banking, their primary
objective.

“It is a choice
between setting up a holding company in order to retain these
businesses under one roof, which implies massive structural challenges,
or selling them off (which I imagine the apex bank would prefer). Now,
if you put yourself in the shoes of the Nigerians who’d have to make
these decisions, do you imagine they would willingly let go?” he said.

Availability of required capital

The Central Bank,
in the new guidelines, said new capital requirement would range from
N10 billion to N50 billion, depending on the level of business they
want to operate. Banks that operate regional banking will require N10
billion, national banks will require N25 billion, while banks that want
to operate international licence would require N50 billion minimum
capital.

The source at First
Bank said the new capital requirement for banks who desire to continue
running their international branches may be realisable.

However, he
expressed worry over the efficiency of investing such an amount of
money when most banks are still struggling to get back on their feet.
“Question is, in the current circumstance, is this the most efficient
use of such resource?” he asked.

According to him,
the new banking model may not necessarily be the way out for the banks
as the issues arising in the industry were not all generated because of
the absence of specialised banking.

“I do not think
this would aid monitoring and improve regulation by the regulatory
body. These are not the reasons why the industry imploded in the first
place.”

He added that this
new process may not also necessarily address the huge percentage of yet
unbanked Nigerians, and that the deadline given to the banks may be
moved, even though the banks are ready for the transition.

Another banker, a staff at Zenith Bank, stated that the initial stages of the transition would not be without some confusion.

“To me, it won’t
change much. In fact, it may cause confusion. You could consider this
from various angles. From the viewpoint of the body of the present
operational staff, most of these banks already have members of staff
specialised in these varying banking services. Limiting them to just
one form of banking would mean that all the staff that are in other
sections would be rendered jobless, unless they would be sent on
special trainings to fit into their new job descriptions, and not all
banks would do this,” he said.

Sunday Salako, a
member of the National Economic Management team, however, said going
back to the basics is the best move to take now.

“That was what we
were doing before. There used to be merchant banks, community banks,
finance houses, and the rest of them and then we had commercial banks
that focused mainly on core banking, retail banking,” he said.

He blamed the
current crisis on the universal banking approach, which allowed banks
to engage in all forms of finance activities, including insurance
underwriting. “Now, they want to go back to the old template. It is a
good thing, going back to the basics. Perhaps, if we didn’t have all
these mumbled up, some of the fraud uncovered in August 14 may not have
occurred at all.”

He also added that
this model would help banks take up functions that they would be
convenient with and that can suit their available funds. “Each bank can
decide on which type of business it would like to run, according to
their expertise and capital accessibility,” he said.

In 2002, the
Central Bank, through the Universal Banking guidelines, authorised
banks to engage in non-core banking financial activities either
directly, as part of banking operations, or indirectly, through
designated subsidiaries.

The Central Bank,
in a circular last week, said the primary objectives for its current
reforms was to ensure the protection of depositor funds by ring fencing
“banking” from non-banking business; redefining the licencing model of
banks and minimum requirements to guide bank operations going forward;
effectively regulating the business of banks without hindering their
growth aspirations; and facilitating more effective regulatory
intervention in public interest entities.

By the circular, the CBN stated that all existing universal banks
are required to prepare and submit their plans on ensuring compliance
with the requirements of the new banking regime not later than 90 days
from October 4, 2010.

Mauritius’ central
bank has said commercial banks need to push up credit growth, the slow
pace of which is contributing to the excess levels of liquidity in the
market.

In a statement seen
by Reuters on Sunday, the Bank of Mauritius said there was a proposal
to cap the holdings of commercial banks in government paper to
encourage more aggressive lending.

The immediate-past
Chairman of Miyyatti Allah Cattle Breeders Association in Gombe State,
Sale Tinka, has condemned farmers’ encroachment into grazing reserves
in the area.

Mr Tinka told
journalists over the weekend in Wawazenge, Gombe State that
encroachment into the ‘Wawazenge’ grazing reserve in Funakaye Local
Government Area of the state is a particular source of friction between
farmers and cattle owners.

Mr Tinka warned that the situation, if not quickly addressed, was capable of creating serious security problems in the area.

He said sometimes ago, members of a vigilante group confiscated some
cows belonging to cattle owners living within the reserve, alleging
that the animals had strayed into their farmlands and destroyed their
crops. “The matter was then resolved, with a pledge that such an
incident will never occur again,’’ Tinka said.

The Niger State
government said it will host 46 Commonwealth countries to a grand
durbar on October 13, to boost the tourism potential of the state.

Adamu Chika, the
Commissioner for Tourism and Culture, said this in Minna at the Minna
Emirate’s durbar, organised as part of the Eid-El-Fitr celebration.

Mr Chika said that
the durbar was part of the state’s strategy to expose its rich cultural
and tourism potential to the international community.

“The Niger State Government has successfully created ‘The Niger
Durbar’ which has attracted the attention of the international
community. A clear demonstration of this is a request made by delegates
from the 46 Commonwealth countries, who would be in Nigeria for an
international programme,’’ he said.

The Nissan Motor
Company Ltd. has put its annual vehicle sale to Nigeria at 4,000 units,
saying this is attributable to its difficulty in understanding the
market.

Michiharu Kayamoto,
the Manager, sub Saharan Africa and Near East Department, made this
known in Yokohama, Japan, when the UNIDO Delegate Programme team
visited the company.

“This figure is too
small compared to what Toyota exports to Nigeria and we really will
want to improve on this,’’ Mr Kayamoto told the News Agency of Nigeria.

However, he said generally, Nissan vehicle sales to Africa dropped
from 72,000 in 2008 to 42,000 in 2009 and the figure remained the same
in the first quarter of 2010.

In the absence of
hard data, all manner of conclusions recommend themselves. And nowhere
is this plainer to see than in the economic sphere. Despite the
readiness of the more granular amongst us to take exceptions with
attempts by economists’ to elevate their calling into a science, I
don’t think one can argue against the need to assign responsibility to
some authority to regularly churn out data on the performance of
economies.

Comparisons across
economies based on such statistics allow assessments of the relative
efficiency of resource use. And within economies, they make it possible
to allocate resources more efficiently. While we may yet be reluctant
to grant the sacredness of “truth” to such data, one cannot but note
that in their absence, the commentariat is wont to run riot.

For illustration,
look no further than the Nigerian economy. The sense that most data on
this economy are available, as if from some sorcerer’s hat, has
encouraged all manner of claims, including what has become the most
laughable of the lot – that somehow, there is something in our
constitution that entitles us to be “the giant of Africa.”

Those who cavil at
this claim quickly direct attention to data on the power sector across
the continent. Three years ago, South Africa (with 4,447 kWh/capita)
had the continent’s highest numbers for “electric power (grid)
consumption per capita”. Egypt (1,375 kWh/capita), Algeria (849
kWh/capita), and Kenya (148 kWh/capita) followed in that order.
Nigeria, the slumbering giant, managed 134 kWh/capita.

In terms of the
usefulness of economic data, this set is especially intriguing.
Cross-country comparisons have meaning when you look at other
supporting data. In this case, both the numbers for population and
economic output help. With a population a whisker less than 50 million,
South Africa’s GDP (calculated at purchasing power parity) in 2007 was
estimated at US$496.2bn. Egypt (population, circa 78m) had GDP of
US$418.5bn. Algeria (population, circa 34m) had GDP of US$229.7bn.
Kenya (population, circa 39m) had GDP of US$59.94bn. “The Giant”, on
the other hand, with 149 million people, had GDP of US$303.4bn.

What to make of all
this? Obviously, the South African economy is much larger than the
Nigerian one, in spite of the latter having three times as many people.
Evidently, certain numbers may not matter as much! However, in terms of
the energy efficiency of the different economies, the Nigerian economy
might just be the better one. On the strength of these numbers, we are
doing about 61% of the South African economy while consuming a little
over 3% of the electricity generated there.

It is difficult not
to enter several caveats here. But is it the case that with all that
number ours might be a less efficient economy; throwing so much at the
development problem, and achieving a fraction of the performance of a
much more efficient economy. Put differently, how much does the power
sector add to economic performance?

“A lot!” is the
popular response. However, if we assume, as the organised private
sector is wont to, that the manufacturing sector will be the main
beneficiary of any increase in power supply in the country, then our
hopes in the redeeming power of more electricity might just be
misplaced. At least, this was the impression I got last week, listening
to Bismarck Rewane speak at the monthly business breakfast of the Lagos
Business School. Even if we had all the electricity infrastructure
running at full capacity, what would this amount to, if all
manufacturing activity in the country accounts for about 3% of GDP?

Another way to look
at this problem is to hazard a response to the hypothetical question,
“whether the manufacturing sector would not have accounted for more of
GDP if it had access to steadier supply of electricity from the mains”.
And what about the boost to other sectors of the economy from better
supply of electricity?

I imagine that
telecoms, wholesale and retail trade, and the services sector generally
will benefit from access to better electricity supply from the mains.
Not to talk of the small and medium enterprises subsector. One other
supporting number: one of the leading telcos in the country is reputed
to be the country’s leading seller of pre-owned power generating sets.
It is easy to see how this particular cost head plays, were the power
sector up to scratch.